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On Our Radar

Why are You Keeping Your debt a Secret?

Previous generations were ashamed of debt. Not only was it relatively rare, but it was also widely regarded as a moral issue. How different things are today! In the first quarter of 2011, U.S. households owed $11.5 trillion in consumer debt, according to the Federal Reserve Bank of New York. True much of that was secured on real estate, but if you strip out mortgages and home equity lines of credit (HELOCs), you're still left with $2.29 trillion. Divide that by the country's population of 312 million, and you find that every man, woman and child in America owes on average $7,340.

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Of course, many owe nothing (babies, children, rich folk, those who are brilliant money managers), but that just means that many others owe more. And some owe much, much more.

Both those figures are surprising. The sum is scary, but the fact that it's shared by 46.1% of households is significant. Virtually one in two of your friends, relations and colleagues is likely to have credit card debt. So why should you be scared to talk about yours?

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It's those who have the biggest problems who are often the least likely to talk about them. Yet they're the very ones who need the most support. They're also the ones who are least likely to be able to keep their issues a secret in the long term.

Some debt collectors try (usually illegally) to leverage payments from the desperate by "mistakenly" letting the debtors' family, colleagues or neighbors know what's going on. Once in court, a debt case becomes a matter of public record. And a foreclosure is eventually going to be obvious to all.

Another group that finds it hard to keep their financial challenges secret comprises the growing number of adult children who are being forced to live with their parents. Investopedia says that there's even an acronym for people in this position: KIPPERS, or Kids in Parents' Pockets Eroding Retirement Savings. Reuters recently quoted Census Bureau data that suggest that, between 2007 and 2010, 1.2 million extra KIPPERS moved back into their parents' homes, bringing their number to 15.8 million. Again, KIPPERS frequently find it hard to keep their situation to themselves.

In many circumstances, keeping your debt secret serves only to put off the evil hour, and simply makes the final denouement even more embarrassing.

It's good to talk

How much easier it would be if we were all more open about these sorts of problems. If the people who are important in your life knew you were experiencing difficulties, they might better understand why you are reluctant to join them in restaurants, bring a bottle of good wine to dinner or travel long distances to family events. And sharing information with your kids may help them moderate their expectations, as well as provide them with potentially valuable money-management lessons for their own futures. Being upfront about how tight things are could allow you to save unnecessary expense, and pay down debt faster.

You might even get an offer or two of help. However, those sometimes present their own problems. If your parents, say, aren't rich, and your chances of repaying them are slight, then you might need to summon the strength to decline their kindness. Better to go bust owing a few credit card companies than crippling mom and dad financially.

Credit card interest rates high

But if someone wealthy offers to bail you out, then why not consider it? At the time of writing average credit card interest rates are running at 16.87%, while savers are often lucky to receive 1 or 2%. If you agreed on a personal loan at 5 or 6%, you could reduce your interest payments by close to two-thirds while your lenders could triple their return on their savings. If that's not a win-win, what is?

Of course, not everyone has rich friends or relations who'd be willing to help. And some may know that the significant people in their lives would greet news of their debt with disdain or worse. But if all that's holding you back from breaking the bad news is an overblown sense of shame, you might find that sharing your problems really does halve them.